Silicon Valley Bank SIVB - $270 to $30 in 48 hours

[FREE866]

I think his conclusions are mostly hyperbole. The Fed isn’t “breaking things”, the Tech industry isn’t broken, housing is reacting in a normal way to the increase in interest rates. If by “breaking” he means substantial loss of value, that is happening to high risk assets, and that’s a good thing.

Appreciate your feedback. Interesting

 

[PlayinwithFIRE]

Heres an aggressive business thought :

If many of the startups in silicon valley had their $$ in SVB and Mr Thiel wanted
a broad salvo to kill off the competition for his own startups...what better way to do it then target their $ supply by pulling your own out from the same institution?

If he messes up the wineries-im gonna be pissed lol.

 

[joesxm3]

Allin Podcast is making the case that there is much more to this SVB incident than discussed in this thread.

They are saying that this could be an "extinction level event" for a large number of small start up companies that had their working capital deposited at SVB. And this could have a devastating impact on the next ten years of innovation.

Also saying that a lot of payroll companies or money transfer companies probably had money at SVB.

Lots of people going to lose jobs when the start ups tank.

 

[FREE866]

Allin Podcast is making the case that there is much more to this SVB incident than discussed in this thread.

They are saying that this could be an "extinction level event" for a large number of small start up companies that had their working capital deposited at SVB. And this could have a devastating impact on the next ten years of innovation.

Also saying that a lot of payroll companies or money transfer companies probably had money at SVB.

Lots of people going to lose jobs when the start ups tank.

I’m listening to that podcast now. “ extinction level event” sounds scary, but what’s to prevent another company from stepping in and becoming a lender for start up companies?

 

[yhoomajor]

I think most here are missing on how SVB got into this spiraling problem.

Higher Interest rates - impacts all Banks. Not unique to SVB.
Most Banks take deposits from Joe, Jane and Business down the street and then put that money in either long duration bonds of some sorts or loan it out to other Businesses, mortgages (Residential or Commercial). Thats how most banks make money. With sprinkles of fees and credit card business here & there. Nothing specific to SVB.

What was unique to SVB (and few more banks in SF / Bay area) is that it catered to start-ups. And mostly Tech start-ups. If anyone is keeping up with news, barely any new money is flowing INTO tech start-ups. It has all dried up. But these start-up are still burning money. To the tunes of billions every month - to make payrolls and fund their sales and marketing operation. So they have been withdrawing from SVB for last several months. In normal times new deposits balance out the withdrawal. But not now.

With this deficit, SVB tried to increase the cash cushion by selling AFS (available for sale) securities - to the tune of $18B. They incurred $1.8Billion loss on that sale.

They tried to cover this loss by selling equity and convertible bonds On Wed/Thursday. That raised the eyebrows across their customer base (VCs and start-ups). Who then withdrew $40Billion by Thursday.

That was Wednesday/Thursday. Rest is history.
https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html

From the article above:
"The roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. It had been forced to sell all of its available-for-sale bonds at a $1.8 billion loss, the bank said late Wednesday."

 

[FREE866]

Question. How much of the public market are start up companies? Seems like those are the most affected

 

[yhoomajor]

Question. How much of the public market are start up companies? Seems like those are the most affected

Most tech Start-up that IPO'd in 2020/21/22 have seen their stock prices fall anywhere from 80-90% to 10-20%. Only a handful (out of hundreds) are above water.

The one that caused the pain for SVB (and similar banks) are pre-ipo companies. They rely on funding from VCs/PEs to stay float (make payrolls etc). They spend more money than they take in (to show the so called growth).

Most of this fake growth in last few years was due to helicopter money from our Government and near-zero interest rates. Now reality is hitting the (fake) Growth-focused companies. Their VCs (themselves cash strapped) can't keep on funneling more money into cash-burning start-ups.

 

[Gumby]

... And this could have a devastating impact on the next ten years of innovation.......

If it kills the companies working on AI, that would be fine by me.

 

[Texas Proud]

Where does the cover over 250 come from?

From money the gvmt gets from selling assets... depositors are one of the first to get paid...




Edit to add.... from FDIC on Washington Mutual...


12. Why do all deposits, insured or not, pass in some transactions but not in others?

The FDIC is required by law to employ the least-cost resolution measure for each failed financial institution. This transaction did not cost the FDIC insurance fund any money and as a result, the uninsured Depositors did not incur a loss either. This transaction is not part of any government bailout program you may have been hearing about. The most frequent result is for the FDIC to transfer only the insured deposits in a merger transaction. The FDIC has been able to transfer all deposits in about 25% of the failures over the past 15 years.

 

[Freedom56]

The Dodd-Frank Act passed in the wake of the 2008 financial crisis. A key rule in the law required that “Too Big To Fail” banks—which Dodd-Frank defined as those with more than $50 billion in assets—undergo stricter oversight, including higher capital ratio requirements designed to shore up the big banks’ ability to withstand financial shocks. The CEO of SVB Financial along with CEOs of other regional banks lobbied congress to raise the threshold for banks that should be subject to this expanded level of supervision from $50 billion in assets to $250 billion. He got is wish in 2018 after it was signed into law. SVB financial with $209 billion in assets continued to operate below the $250 billion threshold to avoid stricter risk management oversight. So the real danger is in regional banking sector where the oversight has bad been relaxed. Canadian banks face even stricter regulations and oversight than the large money center banks in this country.

https://www.federalreserve.gov/releases/lbr/current/

It should be noted that many smaller banks are very safe and among the safest in the country.

https://www.gfmag.com/magazine/november-2022/worlds-safest-banks-2022

 

[Texas Proud]

To be fair, this is nothing like the subprime fiasco. SIVB's trouble stems from the loss of value of its long bonds. Yeah, how can you go wrong holding US Treasuries? It's solid, like the rock of Gibraltar. Right!

The problem with institutional investors is that they cannot deny reality like individual investors and say "You don't lose until you sell". Nope, they have to sell to meet obligations.

And for individual investors, the unrealized loss does not go away. It sits there on your portfolio, even if you try not to look at it.

Yes, I always say that 'paper losses' are real losses... not yet realized but real... now, the security might come back but it is real...


As for a treasury, you can hold to maturity and get the loss back and the is the difference in an individual investor and a bank... when a run comes and you have no money you have to sell..

 

[Texas Proud]

I wonder how that would work in real life. I can't imaging that the bank had the contractual right to call the loan if the depositor made withdrawals.

There are loans that are contingent on the deposit being there... I forget the name of the loan but there are more out there than you might think..


As an example, you van have $100 mill on deposit with an $80 mill loan where you are 'borrowing' your own money at a low rate OR just have $20 mill in cash... most companies like the first as it appears they are more sound with $100 mill in the bank..

 

[Texas Proud]

That raises another question. Is the FDIC limit per institution or can you have more than one $250k accounts across different branches of the same bank?

Either retail branches or via broker CDs?

No, branches are still the same bank...


Most banks offer a plan where they spread the money across many banks so all of your money is insured... may last job that is what we did... had a bit over $5 mill and all was insured and we dealt with only one bank...

 

[Texas Proud]

JP Morgan is not going under. They market time bond purchases just like most reasonable self- directed fixed income investors. While bond funds and apparently many banks were loading up on long duration treasuries at record low yields in 2021, they hoarded an astonishing $500 billion in cash waiting to invest it at higher rates. Yes they market timed and now are in a position to once again swallow up assets of any banks that fail at pennies on the dollar.

https://www.marketwatch.com/story/d...waiting-to-invest-in-higher-rates-11623700397

The only problem is if they will buy... they bought Washington Mutual and then got hosed on their illegal mortgages... had to pay the gvmt billions even though the purchase agreement said they would not be held liable... it was the FDIC that was supposed to be on the hook...

 

[Toocold]

It's amazing how fast this is moving. $270/stock one day, and 45 days later, the bank will dissolved. The federal government is now very efficient at this.

 

[Spock]

Sorry for the side trip from SVB, but all of the talk of start-up companies is triggering flashbacks. I worked at a tiny automation/robotics startup. The CFO couldn't figure out how much $ to move from savings to checking to cover payroll (not exactly advanced math). On payday the spouses would be out in the parking lot. Employees would come out and hand the paycheck to their spouse who would drive straight to the bank. Everybody had a checking account at the same bank the paychecks were drawn at. They would deposit the check into that account so it would clear quicker and immediately xfer the funds to their regular banks. If you were too slow your paycheck might bounce. Things got a little better when the CEO's check bounced.

But the work with robotics+vision systems was actually fun.

 

[Texas Proud]

It's amazing how fast this is moving. $270/stock one day, and 45 days later, the bank will dissolved. The federal government is now very efficient at this.

BTW, a note to remember... they only close banks down on a Friday (unless something big happens) so they have the weekend to close the books and get the 'new' bank with the info needed...

 

[Freedom56]

The only problem is if they will buy... they bought Washington Mutual and then got hosed on their illegal mortgages... had to pay the gvmt billions even though the purchase agreement said they would not be held liable... it was the FDIC that was supposed to be on the hook...

JP Morgan reached a $645M settlement with the FDIC and DB for the illegal mortgages.

https://www.reuters.com/article/us-...ith-fdic-to-receive-645-million-idUSKCN10U28M

They acquired all those branches and deposits from WAMU for pennies on the dollar. Out of all the banks in the US, JP Morgan is the best managed. I would only start to worry about JP Morgan, when Jamie Dimon retires.

 

[Spock]

BTW, a note to remember... they only close banks down on a Friday (unless something big happens) so they have the weekend to close the books and get the 'new' bank with the info needed...

One article was commenting how regulators didn't even wait for COB as "normal" to shut it down and instead closed it during business hours. Electronic withdrawals were pouring in so fast they had to close it ASAP.
Back during the 2008 GFC there was a congress-critter (to use pb4uski's term) on the TV talking about how the bank runs are all digital now. Hundreds of millions fled out of MM's in hours... which now sounds quaint compared to the 42B that was sucked out of SVB. Bank runs are not the long lines out front spectacle anymore... although that happened after a US Senator triggered the collapse of IndyMac.

 

[Montecfo]

Allin Podcast is making the case that there is much more to this SVB incident than discussed in this thread.

They are saying that this could be an "extinction level event" for a large number of small start up companies that had their working capital deposited at SVB. And this could have a devastating impact on the next ten years of innovation.

Also saying that a lot of payroll companies or money transfer companies probably had money at SVB.

Lots of people going to lose jobs when the start ups tank.

I doubt it kills innovation. Why? The most promising technology is still there. It will just be on the market at fire sale prices.

 

[Montecfo]

I think most here are missing on how SVB got into this spiraling problem.

Higher Interest rates - impacts all Banks. Not unique to SVB.
Most Banks take deposits from Joe, Jane and Business down the street and then put that money in either long duration bonds of some sorts or loan it out to other Businesses, mortgages (Residential or Commercial). Thats how most banks make money. With sprinkles of fees and credit card business here & there. Nothing specific to SVB.

What was unique to SVB (and few more banks in SF / Bay area) is that it catered to start-ups. And mostly Tech start-ups. If anyone is keeping up with news, barely any new money is flowing INTO tech start-ups. It has all dried up. But these start-up are still burning money. To the tunes of billions every month - to make payrolls and fund their sales and marketing operation. So they have been withdrawing from SVB for last several months. In normal times new deposits balance out the withdrawal. But not now.

With this deficit, SVB tried to increase the cash cushion by selling AFS (available for sale) securities - to the tune of $18B. They incurred $1.8Billion loss on that sale.

They tried to cover this loss by selling equity and convertible bonds On Wed/Thursday. That raised the eyebrows across their customer base (VCs and start-ups). Who then withdrew $40Billion by Thursday.

That was Wednesday/Thursday. Rest is history.
https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html

From the article above:
"The roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. It had been forced to sell all of its available-for-sale bonds at a $1.8 billion loss, the bank said late Wednesday."

As I assessed this yesterday, I viewed that there could be more risk with PacWest and other venture banks.

Less so with regionals in general.

However, another destabilizing event could change that.

 

[bmcgonig]

I doubt it kills innovation. Why? The most promising technology is still there. It will just be on the market at fire sale prices.

Good chance some promising tech doesn’t get funded if VCs are shy, which they now seem to be.

 

[Born2Fish]

Allin Podcast is making the case that there is much more to this SVB incident than discussed in this thread.

They are saying that this could be an "extinction level event" for a large number of small start up companies that had their working capital deposited at SVB. And this could have a devastating impact on the next ten years of innovation.

Also saying that a lot of payroll companies or money transfer companies probably had money at SVB.

Lots of people going to lose jobs when the start ups tank.

It's a rough world. Worst case, put on your "big-boy" (or "big-girl") pants, you find another job, pack up the house and move.

I moved about every 5-7 years through my career. Bumped up my salary and benefits with every move.

Now is a good time to be job hunting.

There are tons of jobs available. If these workers are truly "leaders of innovation" then they can make a positive impact wherever they go.

This bank made poor decisions and will pay a price. Life goes on.

 

[bmcgonig]

I’m of the opinion now that the government or FDIC should backstop all deposits in all banks over 250k.

First that would avoid the contagion that will occur Monday if every small biz is trying to get out of the small banks cos their payroll etc is in those banks. Just the announcement that the backstop is there wouldn’t cost any money and would stop contagion.

Then we need to figure out some way to FDIC insure all deposits. If it’s a deposit in a bank, and it’s not an investment, then insure it. The banks need to pay for this insurance of course and that will be passed on to those keeping those large deposits.

The weird thing is that we have known about this risk forever and seemingly it’s just being ignored, but I don’t see the point in punishing those businesses that allows themselves to be sucked in. It’s not like they were getting any reward for their deposits, just somewhere to park their payroll etc.

I don’t consider this a bailout since bond holders and equity holders will get nothing.

 

[Quattro73]

10 bucks says we discover Thiel and his cronies had big short positions in the stock.